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Breakfast with Brodsky


Good morning. After a two and a half-day pullback, the market seemed to gain some footing in the late afternoon and stage somewhat of a rally into the close. After two months of steady gains, it seems we may have entered into a turbulent area and I am not so sure we are in the clear yet. The selling was sparked by the Fed changing their language in regards to when they might begin raising rates. We have already known for so long that rates were not going lower, and eventually they would have to be hiked but the market once again "sold the news" and people got spooked, including myself.

Now I do not profess to be an economist on any level, but let's take a look at the landscape and see what we come up with. Gold is getting housed. Earnings releases have been fantastic (Take a look at Nortel (NT: NYSE) for instance.) I mean go through some of these numbers and reports and we can see that spending is picking up, profits are rising, and some tech cycles have room to get stronger. All of this adds up to a healthy environment.

The next obvious question is whether all of these expectations are built into the marketplace. From a technical standpoint a pullback seems to be in order. In regards to the S&P we retraced almost 38% from the December lows to the recent highs of 1150. We violated the first trendline two days ago when we broke 1143 and the next trendline support lies at 1115-1116. I think that this pullback will be a little different this time around for a few reasons but mainly one. During the pullbacks of 2003 very few people I know bought those dips. Now with people ready to pounce on stocks it seems that everyone will be looking to buy the first dip, which is occurring right now. I am generally not a contrarian but with so many people thinking the same thing one has to wonder if that strategy will work yet again. Am I calling for the top? No way. Am I suggesting that this pullback may last longer than two days? It certainly could.

The Dow has worked its way down to the bottom of its trading range although it has not tested its January low of 10,367. The range from 10,300-10,367 could provide support for the index. We touched above on the S&P and the range from 1115-1120 could provide support as well. In my opinion the chart of the NDX looks the healthiest. The NDX began its decent in mid-January and while the Fed-speak sparked more of a sell-off, the NDX retraced almost 50% of its recent move (1466) to 1474, while its 50-day MA is right below that at 1457. A trade and close above 1500 could push this index higher.

On a sector-by-sector breakdown we see that the SOX (Phil Semi) broke its 50-day MA, touched 503 (62% retrace) and bounced back to close just a touch under its 50% retrace and 50-day MA level of 515. A trade above yesterday's high of 520 could push this index higher. Look for support at the 503 range. The BTK (Amex Biotech) was able to reverse and close above 520. The BTK has been in a bull flag pattern with its bottom trendline support at 511 (low from yesterday) and its resistance is at 524 (high from yesterday.) A trade and close above 524 could push this index higher.

The Banks (BKX) were able to hold a trendline that stretches back to September. It touched 980 before reversing course and closed at its high of 991. Yesterday's low of 980 is support. The Cyclical stocks have been in pullback mode as well and could have more room to the downside before finding solid support. The first level of support for the CYC is at 670 which is an intersection of a 38% retrace as well as a trendline connecting the lows of September and November.

The HGX (Phil Housing) has pulled back into the range where it has held numerous times since November. A break of 346-342 could send this index lower which is clearly out of favor since we are headed for a hike in rates (seems too easy of a trade to me.) The XAU (Gold/Silver) broke down hard and could be headed to support at the 89-90 level. Its 200-day MA is at 89 and a trade back above 95.45 could push the index back to 100. Good Luck.

No positions in stocks mentioned.

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